Sunday, May 13, 2007
Market Update
The bull market remains intact - the model is indicating that overbought conditions will persist next week. We might be very close to the final top in the market - some of my E-Wave counts support the possibility that we are in the final wave up from the 2002 bottom - and the likelihood of recession remains strong as long as the yield curve remains inverted and now the economy's growth rate has slowed to 1.3%. However, the wave pattern has kept extending and extending and both these indicators made me too bearish too soon. In the meantime the Chinese government is going to let domestic financial institutions invest in foreign stocks for the first time. EWH - the Hong Kong ETF - and FXI - the H-share (mainland companies listed in Hong Kong) ETFs both rose steeply on Friday. The Hong Kong market should rocket up on Monday. On the other hand the Shanghai market could then suffer a correction. Shanghai shares are extremely overvalued compared to the shares of Chinese companies listed in Hong Kong and Shanghai but it has been difficult for foreign investors to trade in the mainland stock markets or PRC investors to invest in Hong Kong or the US. Arbitrage between the markets was, therefore, not occurring. I won't, therefore, be surprised to see a pullback in US stocks on Monday morning in reaction, especially after the strong rally in the US on Friday. In all likelihood it would be a buying opportunity given the state of my model a strong correction here doesn't seem likely. I just ran a scenario where the Friday rally completely reverses - in this case the overbought condition will likely come to an end and we will be set up for a bigger correction in a week or two.
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2 comments:
Hey Moomin,
Sorry about the recent weakness in your trading. I know its hard to see your account slowly dropping while all the major indices head higher, but then again all the greats were contrarians and the only difference between them and other people that didn't make it to their mansions in Stamford was that they had the stomach to stick it out and proper risk management.
I think its really hard to time this market and to go short. If you want downside protection for your portfolio why not buy a few puts? And/or structure your portfolio into a long/short equity - 0 beta portfolio?
How much faith do you put into your model? I think parameter instability is a big reason why some managers make a killing over a cycle while do absolutely dismal in the next.
Hi BackOfficeMonkey - thanks for your friendly comments - I am not really looking for downside protection for my portfolio - its market sensitivity is pretty low as overall I am about 50/50 in stocks and bonds and have a beta of something like 0.4. I am just trying to add extra income or "alpha" by trading a small amount of capital. The loss in trading is about 1% of net worth but 15% of my trading capital this month so far. 1% doesn't sound a lot but in dollars it is more than $4k... as my wealth has grown I am having a harder time dealing with what would once have been to my mind small losses in percentage terms because the dollar amounts are going up.
I have a lot of intellectual trust in the model as the backtesting is so good. But emotionally it is a lot harder just doing what it says. I think I am getting better but it is a slow struggle.
Moom
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